Mutations in the gene encoding the phosphotyrosine phosphatase PTP1C, a cytoplasmic protein containing a COOH-terminal catalytic and two NH2-terminal Src homology 2 (SH2) domains, have been identified in motheaten (me) and viable motheaten (mev) mice and are associated with severe hemopoietic dysregulation. The me mutation is predicted to result in termination of the PTP1C polypeptide within the first SH2 domain, whereas the mev mutation creates an insertion or deletion in the phosphatase domain. No PTP1C RNA or protein could be detected in the hemopoietic tissues of me mice, nor could PTP1C phosphotyrosine phosphatase activity be isolated from cells homozygous for the me mutation. In contrast, mice homozygous for the less severe mev mutation expressed levels of full-length PTP1C protein comparable to those detected in wild type mice and the SH2 domains of mev PTP1C bound normally to phosphotyrosine-containing ligands in vitro. Nevertheless, the mev mutation induced a marked reduction in PTP1C activity. These observations provide strong evidence that the motheaten phenotypic results from loss-of-function mutations in the PTP1C gene and imply a critical role for PTP1C in the regulation of hemopoietic differentiation and immune function.